Underwriting for Beginners

by Mortgage Nerd on April 26, 2011 · 4 comments

When I first started out as a loan officer my manager taught me about an acronym to help me understand the basic principles of mortgage underwriting. And I think that it could be helpful for somebody that is looking to get a mortgage. The acronym is PACIT and it stands for:

  • Property: This is the collateral against which the mortgage loan is secured. Like with any loan, without good collateral the loan won’t be approved. Specifically, underwriters are going to look at the loan-to-value of the transaction and also the overall condition of the property in the appraisal report.
  • Assets: A general rule of thumb for mortgage underwriting is the bigger down payment you have the more “skin in the game” you have and the less likely you are to walk away from making your mortgage payments if you have a tragedy in your life. It also doesn’t hurt to have some reserves in your bank account in case you lose your job.
  • Credit: Your credit report is kind of like a report card for your financial behavior. Just like in school, you don’t have to be the smartest to get good grades but you have to know how the system works. The higher your credit score the more likely you will get a loan approval and the best interest rate.
  • Income: Underwriters will look at the stability of your income based on your employment history and the type of income that you receive (i.e. bonus, commission, part-time, etc.). They will also take into account the percentage of your income that will go towards the mortgage payment and also your other debts (i.e. student loans, credit cards, car loans, etc.).
  • Transaction:You don’t have to be perfect with each of the above variables because underwriters will look at the transaction as a whole to make a decision. For example, if you you have a strong employment history and money in the bank than those could act as compensating factors for a poor credit score.
  • I believe that it is always helpful to think like the underwriters do. If you can see things from their point of view than you will likely have a better experience going through the loan process.

    { 3 comments… read them below or add one }

    Buck Inspire May 24, 2011 at 4:11 am

    Terrific acronym. Will keep this in mind! Do you think the housing bubble is over?

    Reply

    John Neil May 24, 2011 at 4:32 am

    Thanks! I am sure that in some parts of the country that real estate has hit rock bottom. You hear about places like Phoenix or Las Vegas where real estate was just decimated and it would be hard to imagine that it could get worse.

    One thing I will say is that as long as the government continues to make it more difficult for people to get mortgages, the housing market will continue to suffer. There is word that starting in June they are coming out with a rule that will make loan originators keep a 5% stake in every mortgage that they do, unless the loan has such characteristics as 20% down, low DTI, etc.

    From what I am hearing, it could be a devastating blow to the mortgage industry and housing in general.

    Reply

    Juan Diego June 8, 2011 at 4:30 am

    I enjoyed this post. I am going through a difficult refinance process and it helps to know what the underwriter is looking at. I wish my loan officer would have shared this with me.

    Reply

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